Question 5

Part I:

You have been asked to investigate the cash sales system of AAA Ltd, one of the subsidiaries. AAA Ltd sells office supplies in the Melbourne area. Its prices are highly competitive and it offers a same-day delivery service for orders telephoned before noon. Costs are kept down by requiring cash on delivery. Sales are made in the following way: 

1. The customer phones through an order to the sales department, which raises a prenumbered multicopy sales order, two of which (the invoice copies) are priced and totalled.

2. The dispatch department makes up the order and gives the goods to the driver with the invoice copies of the order.

3. The driver delivers the goods, collects the cash and receipts the customer’s copy of the invoice.

4. The cashier records and banks the cash.

Required:

State four (4) weaknesses in the cash sales system.

Part II

For the following independent and material situations, assume that you are the audit partner on the engagement:

1. Your client reported a note receivable consisting of principal and accrued interest receivable. The maker of the note filed a bankruptcy petition, but the client refused to reduce the recorded value of the note to its net realisable value. The net realizable value was 22 per cent of the amount reported.

2. Kieko Co. Ltd has prepared financial statements but has decided to exclude the statement of cash flows. Management explains to you that the users of their financial statements find this statement confusing and prefer not to have it included.

3. There was a fire that broke out a month before the year-end date. The fire has destroyed most of the accounting records and underlying receipts and invoices. Management has reconstructed the accounting records using its bank statements and other means, but they are uncertain if all material matters have been taken into account and they would like to wait until after a couple of months when subsequent receipts may assist them to compile further outstanding items. You have serious doubts as to the accuracy of the compiled figures and have been unable to verify any of the material balances.

4. Auto Delivery Company Ltd has a fleet of several delivery trucks. In the past, Auto Delivery has followed the policy of purchasing all equipment. In the current year, it decided to lease the trucks. The method of accounting for the trucks is therefore changed to lease capitalisation. This change in policy is fully disclosed in footnotes.

Required:

For each of the above independent situation, state what type of audit report are you going to issue. Explain your answer.